European shares hit an 18-month high and the euro and euro zone periphery bonds climbed on Tuesday, buoyed by a pick-up in German confidence indicators and expectations the Federal Reserve will keep pumping money into the U.S. economy.

Following some disappointing euro zone data this month, the ZEW survey provided some relief for markets, showing confidence among German investors and economists increased sharply in November.

Markets had been rattled on Monday by Italian Prime Minister Mario Monti's announcement he would step down some weeks early. But the upbeat ZEW data helped lift shares and the euro from their gloom.

The pan-European FTSEurofirst 300 share index was up 0.3 percent at 1137.90 points by 1100 GMT, its highest since June 2011, though it later eased back a little. Italian bonds shrugged off their early morning weakness and the euro hit a session high $1.2974.

Many economists expect the German economy to contract in the fourth quarter under the weight of the euro zone's troubles, but leading indicators like the ZEW and a separate survey from the Ifo institute suggest it could bounce back in early 2013.

"The (ZEW) rise confirms earlier worldwide survey results signalling that the global industrial cycle has turned and that world trade is picking up," said Aline Schuiling a senior economist at ABN Amro.     

FED FOCUS

The other main focus for investors was a meeting of the Federal Reserve, and ongoing "fiscal cliff" talks in the U.S. to avoid $600 billion of previously drawn up spending cuts and tax hikes suddenly kicking in in the new year.

When the Fed concludes its meeting on Wednesday, the central bank is expected to extend its asset purchase scheme and commit to buy $45 billion of U.S. debt each month.

Expectations of more easing put the dollar on the back foot and pushed the Canadian dollar to a two-month high of C$0.9862 per U.S. dollar, while the New Zealand dollar hit a nine-month high of $0.8367.

Bank of England Governor Mervyn King warned on Monday that continued imbalance in the global economy may see more competitive depreciation of currencies as countries resort to "actively managed exchange rates", in place of domestic monetary policy priorities, as a way to encourage growth.

In the oil market, Brent crude rose back above $108 a barrel as continued unrest in Egypt and Syria underscored the continuing tensions blighting the Middle East, the world's major oil exporting region.

Gold was steady at $1,709.75 an ounce, with more U.S. stimulus expected to support gold's appeal as a hedge against inflation.

Asian equities had earlier hit a 16-month high and the combined rises in Europe left the MSCI index of world stocks up 0.2 percent at 335.51, its highest level in almost two months.

"The ZEW index is the first survey pointing to an actual turnaround," said Christian Schulz at Berenberg bank, adding that the signs of a pick-up could reduce the chance of the European Central Bank cutting interest rates again.